Tecnologías más utilizadas por niños en su estilo de vida

price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

D

0 247

160

Priceper millions of metric tons ($)

Millions of metric tons of wheat C

B

A

35.0 41.5 61.7 P

Q S_{fall 2010} Sspring 2010

쒀 FIGURE 4.1 The Market for Wheat

Fires in Russia in the summer of 2010 caused a shift in the world's supply of wheat to the left, causing the price to increase from $160 per millions of metric tons to $247. The equilibrium moved from C to B.

wheat supply was substantial. In the figure, the supply curve for wheat, which had been drawn in expectation of harvesting all the wheat planted in Russia along with the rest of the world, now shifted to the left, from Sspring 2010to S_{fall 2010}. This shift in the supply curve created a situation of excess demand at the old price of $160. At that price, the quantity demanded is 61.7 million metric tons but the burning of much of the Russia supply left the world with only 35 millions of metric tons expected to be supplied. Quantity demanded exceeded quantity supplied at the orig-inal price by 26.7 million metric tons.

The reduced supply caused the price of wheat to rise sharply. As the price rises, the available sup-ply is “rationed.” Those who are willing and able to pay the most get it. You can see the market’s rationing function clearly in Figure 4.1. As the price rises from $160, the quantity demanded declines along the demand curve, moving from point C (61.7 million tons) toward point B (41.5 million tons).

The higher prices mean that prices for products like Pepperidge Farm bread and Shredded Wheat cereal, which use wheat as an essential ingredient, also rise. People bake fewer cakes, and begin to eat more rye bread and switch from Shredded Wheat to Corn Flakes in response to the price changes.

As prices rise, wheat farmers also change their behavior, though supply responsiveness is limited in the short term. Farmers outside of Russia, seeing the price rise, harvest their crops more carefully, getting more precious grains from each stalk. Perhaps some wheat is taken out of storage and brought to market. Quantity supplied increases from 35 million metric tons (point A) to 41.5 million tons (point B). The price increase has encouraged farmers who can to make up for part of the Russia wheat loss.

A new equilibrium is established at a price of $247 per millions of metric tons, with 41.5 mil-lion tons transacted. The market has determined who gets the wheat: The lower total supply is rationed to those who are willing and able to pay the higher price.

This idea of “willingness to pay” is central to the distribution of available supply, and willing-ness depends on both desire (preferences) and income/wealth. Willingwilling-ness to pay does not neces-sarily mean that only the very rich will continue to buy wheat when the price increases. For anyone to continue to buy wheat at a higher price, his or her enjoyment comes at a higher cost in terms of other goods and services.

In sum:

The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good—that is, when a shortage exists—in a free market, the price of the good will rise until quantity supplied equals quantity demanded—

that is, until the market clears.

S

D

1 0 140,000,000

Price ($)

Quantity of Jackson Pollock’s “No. 5, 1948”

쑸 FIGURE 4.2 Market for a Rare Painting

There is some price that will clear any market, even if supply is strictly limited. In an auction for a unique painting, the price (bid) will rise to eliminate excess demand until there is only one bidder willing to purchase the single available painting. Some estimate that the Mona Lisa would sell for $600 million if auctioned.

There is some price that will clear any market you can think of. Consider the market for a famous painting such as Jackson Pollock’s No. 5, 1948, illustrated in Figure 4.2. At a low price, there would be an enormous excess demand for such an important painting. The price would be bid up until there was only one remaining demander. Presumably, that price would be very high. In fact, the Pollock painting sold for a record $140 million in 2006. If the product is in strictly scarce supply, as a single painting is, its price is said to be demand-determined. That is,

E C O N O M I C S I N P R A C T I C E

Prices and Total Expenditure: A Lesson From the Lobster Industry in 2008–2009

It is very important to distinguish between the priceof a product and total expenditurefrom that product. A recent report on the lobster mar-ket in New England shows how it can be confusing. See if you can fig-ure out what happened to the price and quantity of lobsters trapped in Maine between 2008 and 2009.

The following short passage was taken from an Associated Press article dated March 1, 2010.

Lobster Prices Plummet As Maine Fisherman Catch Way Too Many

Business Insider

PORTLAND, Maine (AP)—Officials say Maine lobstermen had a record harvest in 2009, but the value of the catch continued to plunge amid the sour global economy.

The Department of Marine Resources announced Monday that lobstermen caught 75.6 million pounds last year, up 8 percent from 2008. But the value of the catch fell

$23 million, to $221.7 million.

Source:Used with permission of The Associated Press. Copyright © 2010.

All rights reserved.

Total revenue or expenditure in a market is simply the number of units sold multiplied by the price. The author of this article seems

surprised that the total revenue in the lobster business (or valueas he calls it) has fallen despite an increase in the catch. But of course, when supply curves shift right, as has happened here, prices typically fall, unless something has simultaneously happened to shift the demand curve. With an increase in volume and a decrease in price, total revenue could go up or down. In 2009, in the lobster market, revenue apparently fell.

Incidentally, the data given in the article allows you to find prices for 2008 and 2009 as well as quantities. (The price in 2008 was $3.50 and in 2009, $2.93.) Make sure you see how these num-bers are derived.

its price is determined solely and exclusively by the amount that the highest bidder or highest bidders are willing to pay.

One might interpret the statement that “there is some price that will clear any market” to mean “everything has its price,” but that is not exactly what it means. Suppose you own a small silver bracelet that has been in your family for generations. It is quite possible that you would not sell it foranyamount of money. Does this mean that the market is not working, or that quantity supplied and quantity demanded are not equal? Not at all. It simply means thatyou are the highest bidder. By turning down all bids, you must be willing to forgo what anybody offers for it.

Constraints on the Market and Alternative Rationing Mechanisms

On occasion, both governments and private firms decide to use some mechanism other than the mar-ket system to ration an item for which there is excess demand at the current price. Policies designed to stop price rationing are commonly justified in a number of ways.

The rationale most often used is fairness. It is not “fair” to let landlords charge high rents, not fair for oil companies to run up the price of gasoline, not fair for insurance companies to charge enormous premiums, and so on. After all, the argument goes, we have no choice but to pay—

housing and insurance are necessary, and one needs gasoline to get to work. Although it is not precisely true that price rationing allocates goods and services solely on the basis of income and wealth, income and wealth do constrain our wants. Why should all the gasoline or all the tickets to the World Series go just to the rich?

Various schemes to keep price from rising to equilibrium are based on several percep-tions of injustice, among them (1) that price-gouging is bad, (2) that income is unfairly distributed, and (3) that some items are necessities and everyone should be able to buy them at a “reasonable” price. Regardless of the rationale, the following examples will make two things clear:

1. Attempts to bypass price rationing in the market and to use alternative rationing devices are more difficult and more costly than they would seem at first glance.

2. Very often such attempts distribute costs and benefits among households in unintended ways.

Oil, Gasoline, and OPEC One of the most important prices in the world is the price of crude oil. Millions of barrels of oil are traded every day. It is a major input into virtually every product pro-duced. It heats our homes, and it is used to produce the gasoline that runs our cars. Its production has led to massive environmental disasters as well as wars. Its price has fluctuated wildly, leading to major macroeconomic problems. But oil is like other commodities in that its price is determined by the basic forces of supply and demand. Oil provides a good example of how markets work and how markets sometimes fail.

The Organization of the Petroleum Exporting Countries (OPEC) is an organization of twelve countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela) that together controlled about one-third of the known supply of oil in the year 2010. In 1973 and 1974, OPEC imposed an embargo on shipments of crude oil to the United States. What followed was a drastic reduction in the quantity of gasoline available at local gas pumps.

Had the market system been allowed to operate, refined gasoline prices would have increased dramatically until quantity supplied was equal to quantity demanded. However, the government decided that rationing gasoline only to those who were willing and able to pay the most was unfair, and Congress imposed aprice ceiling, or maximum price, of $0.57 per gallon of leaded regular gasoline. That price ceiling was intended to keep gasoline “affordable,” but it also perpetuated the shortage. At the restricted price, quantity demanded remained greater price ceiling A maximum

price that sellers may charge for a good, usually set by government.

queuing Waiting in line as a means of distributing goods and services: a nonprice rationing mechanism.

1You can also show formally that the result is inefficient—that there is a resulting net loss of total value to society. First, there is the cost of waiting in line. Time has a value. With price rationing, no one has to wait in line and the value of that time is saved. Second, there may be additional lost value if the gasoline ends up in the hands of someone who places a lower value on it than someone else who gets no gas. Suppose, for example, that the market price of gasoline if unconstrained would rise to

$2 but that the government has it fixed at $1. There will be long lines to get gas. Imagine that to motorist A, 10 gallons of gas is worth $35 but that she fails to get gas because her time is too valuable to wait in line. To motorist B, 10 gallons is worth only $15, but his time is worth much less, so he gets the gas. In the end, A could pay B for the gas and both would be better off. If A pays B $30 for the gas, A is $5 better off and B is $15 better off. In addition, A does not have to wait in line. Thus, the allocation that results from nonprice rationing involves a net loss of value. Such losses are called deadweight losses. See p. 92 of this chapter.

1.50

0.57

0 Quantity supplied Quantity demanded D₁₉₇₄ S₁₉₇₄

Excess demand or shortage Gallons per year

Pricepergallon ($)

P

Q

쒀 FIGURE 4.3 Excess Demand (Shortage) Created by a Price Ceiling

In 1974, a ceiling price of $0.57 cents per gallon of leaded regular gasoline was imposed. If the price had been set by the interaction of supply and demand instead, it would have increased to approximately

$1.50 per gallon. At $0.57 per gallon, the quantity demanded exceeded the quantity supplied. Because the price system was not allowed to function, an alternative rationing system had to be found to distribute the available supply of gasoline.

than quantity supplied, and the available gasoline had to be divided up somehow among all potential demanders.

You can see the effects of the price ceiling by looking carefully at Figure 4.3. If the price had been set by the interaction of supply and demand, it would have increased to approximately

$1.50 per gallon. Instead, Congress made it illegal to sell gasoline for more than $0.57 per gallon.

At that price, quantity demanded exceeded quantity supplied and a shortage existed. Because the price system was not allowed to function, an alternative rationing system had to be found to dis-tribute the available supply of gasoline.

Several devices were tried. The most common of all nonprice rationing systems is queuing, a term that means waiting in line. During 1974, very long lines formed daily at gas stations, starting as early as 5 A.M. Under this system, gasoline went to those people who were willing to pay the most, but the sacrifice was measured in hours and aggravation instead of dollars.¹

A second nonprice rationing device used during the gasoline crisis was that of favored customers. Many gas station owners decided not to sell gasoline to the general public, but to reserve their scarce supplies for friends and favored customers. Not surprisingly, many customers tried to become “favored” by offering side payments to gas station owners. Owners also charged high prices for service. By doing so, they increased the real price of gasoline but hid it in service overcharges to get around the ceiling.

Yet another method of dividing up available supply is the use ofration coupons. It was sug-gested in both 1974 and 1979 that families be given ration tickets or coupons that would entitle them to purchase a certain number of gallons of gasoline each month. That way, everyone would get the same amount regardless of income. Such a system had been employed in the United States during the 1940s when wartime price ceilings on meat, sugar, butter, tires, nylon stockings, and many other items were imposed.

When ration coupons are used with no prohibition against trading them, however, the result is almost identical to a system of price rationing. Those who are willing and able to pay the most buy up the coupons and use them to purchase gasoline, chocolate, fresh eggs, or anything else that is sold at a restricted price.²This means that the price of the restricted good will effectively rise to the market-clearing price. For instance, suppose that you decide not to sell your ration coupon. You are then forgoing what you would have received by selling the coupon. Thus, the

“real” price of the good you purchase will be higher (if only in opportunity cost) than the restricted price. Even when trading coupons is declared illegal, it is virtually impossible to stop black markets from developing. In a black market,illegal trading takes place at market-determined prices.

Rationing Mechanisms for Concert and Sports Tickets Tickets for sporting events such as the World Series, the Super Bowl, and the World Cup command huge prices in the open market. In many cases, the prices are substantially above the original issue price. One of the hottest basketball tickets ever was one to the Boston Celtics and Los Angeles Lakers’ NBA final series in 2010 that LA won in seven games. The online price for a courtside seat to one of the games in Los Angeles was $19,000. On September 16, 2007, Justin Timberlake performed at the Staples Center in Los Angeles. The day before the concert, you could buy a front row ticket for

$16,000 on the StubHub Web site.

You might ask why a profit-maximizing enterprise would not charge the highest price it could? The answer depends on the event. If the Chicago Cubs got into the World Series, the peo-ple of Chicago would buy all the tickets available for thousands of dollars each. But if the Cubs actually charged$2,000 a ticket, the hard-working fans would be furious: “Greedy Cubs Gouge Fans” the headlines would scream. Ordinary loyal fans earning reasonable salaries would not be able to afford those prices. Next season, perhaps some of those irate fans would change loyalties, supporting the White Sox over the Cubs. In part to keep from alienating loyal fans, prices for championship games are held down. But not every concert promoter or sports team behaves this way. In 2000, Barbra Streisand gave a concert in Sydney, Australia. Tickets were issued with a face valueof $1,530, a record for a concert that still stands today.

Let’s consider a concert at the Staples Center, which has 20,000 seats. The supply of tick-ets is thus fixed at 20,000. Of course, there are good seats and bad seats, but to keep things simple, let’s assume that all seats are the same and that the promoters charge $50 per ticket for all tickets. This is illustrated in Figure 4.4. Supply is represented by a vertical line at

2Of course, if you are assigned a number of tickets and you sell them, you are better off than you would be with price rationing.

Ration coupons thus serve as a way of redistributing income.

favored customers Those who receive special treatment from dealers during situations of excess demand.

ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.

black market A market in which illegal trading takes place at market-determined prices.

300

20,000 Quantity

supplied

Tickets to a concert at the Staples Center 38,000

Quantity demanded

Price ($)

50 D

S P

Q Excess demand = shortage

쒀 FIGURE 4.4 Supply of and Demand for a Concert at the Staples Center

At the face-value price of $50, there is excess demand for seats to the concert. At $50 the quantity demanded is greater than the quantity supplied, which is fixed at 20,000 seats. The diagram shows that the quantity demanded would equal the quantity supplied at a price of $300 per ticket.

20,000. Changing the price does not change the supply of seats. In the figure the quantity demanded at the price of $50 is 38,000, so at this price there is excess demand of 18,000.

Who would get to buy the $50 tickets? As in the case of gasoline, a variety of rationing mechanisms might be used. The most common is queuing, waiting in line. The tickets would go on sale at a particular time, and people would show up and wait. Now ticket sellers have virtual waiting rooms online. Tickets for the World Series go on sale at a particular time in September, and the people who log on to team Web sites at the right moment get into an electronic queue and can buy tickets. Often tickets are sold out in a matter of minutes.

There are also, of course, favored customers. Those who get tickets without queuing are local politicians, sponsors, and friends of the artist or friends of the players.

But “once the dust settles,” the power of technology and the concept of opportunity cost take over. Even if you get the ticket for the (relatively) low price of $50, that is not the true cost.

The true cost is what you give up to sit in the seat. If people on eBay, StubHub, or Ticketmaster are willing to pay $300 for your ticket, that’s what you must pay, or sacrifice, to go to the con-cert. Many people—even strong fans—will choose to sell that ticket. Once again, it is difficult to stop the market from rationing the tickets to those people who are willing and able to pay the most.